Breach of Contract or Negligence: Does it Really Matter?

The Pennsylvania Supreme Court is set to entertain argument on an important appellate issue regarding the types of damages available to a plaintiff in a legal malpractice dispute.  The decision may also highlight the fundamental differences, if any, between a malpractice suit grounded in tort or contract. In 2006, a national law firm agreed to represent the plaintiffs in the sale of a company that had incurred over $2 million in unpaid taxes.  According to the plaintiffs, the law firm advised them that the sale would terminate their personal liability for the unpaid taxes.  When the company’s assets withered after the transaction, however, the individuals that sold the company were held personally liable for all unpaid taxes and they turned to their former lawyers to recover.

The plaintiffs filed suit against the law firm in 2010, asserting a claim for breach of contract, seeking consequential damages.  (Importantly, the plaintiffs’ negligence claims were time-barred by the applicable statute of limitations).  The defendant law firm moved to dismiss contending that the plaintiffs were barred from asserting malpractice based on breach of contract because the plaintiffs never paid the firm for professional services rendered. In other words, the firm alleged that there are no recoverable damages.  In support, the firm relied on the Pennsylvania Supreme Court’s decision in Bailey v. Tucker, a 1993 case holding that damages for legal malpractice in a criminal action for breach of contract are limited to the legal fees paid plus statutory interest. 

The court of common pleas agreed and granted the defendant law firm’s preliminary objections, Pennsylvania’s version of a motion to dismiss.  On appeal, the Pennsylvania Superior Court reversed and concluded that the Bailey limitation on damages applies only in a criminal proceeding.  The Supreme Court will now consider whether damages for legal malpractice for breach of contract in a civil suit are limited to the amount paid for services.

Depending on your jurisdiction, there may be fundamentally little difference between a professional malpractice suit sounding in tort (negligence) or breach of contract.  Often, as the case was here, this is important due to the different limitations period that applies.  This may also play an important role in evaluating the applicable damages and/or whether contractual engagement letter defenses are available.  The takeaway is that the potential for liability against the firm for consequential damages for an alleged breach of contract underscores the importance of having a clear engagement letter clearly delineating the scope and nature of a professional’s representation.  A failure to do so will increase exposure to malpractice claims, even where, as here, negligence is not at issue.

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